If you want to know just how pervasive wireless phones are becoming in Indonesia, just ask the country's president, Susilo Bambang Yudhoyono. No, seriously. Ask him. On Saturday, Yudhoyono gave out his mobile phone number to a gathering of farmers in his homeland and invited them to call or text-message him with complaints any time of day or night. The media broadcast the number nationwide and within minutes the president's cell phone lit up with the first of thousands of complaints. Yudhoyono's gambit made two miscalculations: He not only underestimated the discontent of Indonesians, but also their ready and increasing access to wireless phones. Two clear beneficiaries of the rising demand for mobile phones in Indonesia are the country's largest cell-phone providers: Telkomsel, 65% owned by government-controlled Telkom Indonesia ( TLK) and 35% owned by Singapore Telecom; and PT Indosat ( IIT), largely owned by the Indonesian government and Singapore Technologies Telemedia. Last year, Indosat saw a 59% increase in cellular subscribers to 9.8 million users, pushing cellular revenue up 46% to $802 million. Telkomsel saw its subscriber base expand by 87% to 16 million in 2004. Since then, both companies have continued to add subscribers, with Indosat reaching 12 million and Telkomsel topping 20 million out of a total population of 242 million residents. Of the two companies, Indosat, which has moved away from its roots as the state-run international call carrier to a company driven by wireless service, offers U.S. investors a purer exposure to the growing wireless market. Its ADRs are actively traded on the NYSE. Nearly 70% of Indosat's revenue comes from its wireless business. Telkomsel has the larger share of the Indonesian market, but direct ownership is limited to its parent companies. U.S. investors, however, can buy ADRs of the larger of its two shareholders, Telkom Indonesia. Telkomsel controls 52% of the Indonesian cellular market, with Indosat controlling 32%, and smaller players such as Excelcom make up the remaining 16%.
Both ADRs have seen declines this year that may have left them at attractive levels. Indosat's ADRs rose from $9.25 in August 2003 to $34.40 this January, but have since fallen back to $28.19 as of Tuesday. Telkom Indonesia, Telkomsel's parent, followed a similar trajectory, rising from $9.35 in August 2003 to $23.68 last December and falling back to $20.24. It didn't help that Indosat posted disappointing earnings for the first quarter. Despite the selloff, analysts stayed cautious, and some even saw it as a buying opportunity. Research from GK Goh, which has no underwriting relationship with Indosat, noted that the first quarter is seasonally weak and held out hope for a strong 2005. A broader concern, however, is that the Indonesian wireless market is likely to grow more crowded as non-Indonesian players move in. In March, Hutchison Telecom ( HTX), a unit of Hong Kong-based Hutchison Whampoa, said it planned to buy a 60% stake in Indonesian wireless company PT Cyber Access for $120 million. And Maxis, Malaysia's largest mobile services provider, owns a majority stake of PT Natrindo Telepon Seluler, a small wireless company in Indonesia. In the face of the growing competition, worries that Indosat would fare poorly in the allocation of 3G frequencies added to its declines earlier this year. More recently, the government has indicated it would allow Indosat a piece of the 3G spectrum. But these concerns may be priced into the wireless stocks. Verdi Budiman, an analyst with Merrill Lynch, which has no underwriting relationship with Indosat, raised his rating on Indosat from neutral to buy on June 3, arguing that the recent declines have factored in the potential negatives. "Even if investment plans by new entrants come in according to plan, market share impact may not be felt until 2007," Budiman says. "And when it comes, it will be less than investors feared." He says that the slow reversal of the 3G license allocation indicates that "Indosat will end up with a valid 3G license and spectrum."
But despite recent attempts at deregulating Indonesia's telecom market, the two state-controlled wireless companies say they are likely to have the edge in the future. Sites for towers and antennas are getting harder to come by, and demand will likely rise as the country gets ready for 3G service. But Indosat and Telkomsel can easily rely on their own existing sites at less cost than can new competitors. Both companies are also investing hundreds of millions in their expansion plans this year. Indosat has budgeted as much as $900 million in capital spending this year, a 33% increase over the 2004 budget. The spending is earmarked largely for cellular equipment to expand its coverage, which reaches 70% of the country's population, to more potential customers. For its part, Telkomsel -- which already reaches 90% of Indonesia's population -- is planning to spend $700 million. Indosat is expected to sell between $200 million and $250 million this week in a seven-year bond offering. Moody's rated the proposed bonds B1, saying the outlook for the company was positive provided it can stave off an eroding market share amid rising competition and leverage its investments into strong growth. To some degree, the bond offering will repay the hefty dividend that Indosat's shareholders demanded for themselves. Half of the company's $176 million net profit in 2004 was paid in the form of a disclosure, despite Indosat's need to spend on new equipment. That prompted one research firm, BNI Securities, to consider downgrading its rating on the stock last week. Indonesia is the fifth most populous country and larger than such growing economies as Brazil and Russia, as well as industrialized nations such as Japan. According to Merrill Lynch, Indonesia's wireless penetration rate is 13%, compared with 25% in China and 41% in the Philippines. Indonesia telecom officials project that wireless subscribers will grow by 40% this year. Despite that anticipated growth, both companies are seeing less money per subscriber as competition drives down pricing. Indosat and Telkomsel have been seeing average revenue-per-user rates fall 10% to 17% from year-ago levels. But with GDP, which is equal to about $3,500 per capita and growing about 5% a year, more middle-class customers may be willing to subscribe to wireless service. And if the economy doesn't grow fast enough to keep Indosat and Telkomsel signing up new customers, you know to whom you should complain. The country's president can be reached by dialing 62-811-109-949.